Economists Cut Forecasts for US Growth in 2008

Reuters

Wednesday, 10 Oct 2007 | 3:41 AM ETReuters

SHARES

U.S. economists have chopped their forecasts for 2008 economic growth for a third straight month, saying the housing slump will be deeper and last longer than earlier expected, a survey released on Wednesday showed.

The consensus of economists surveyed by the Blue Chip Economic Indicators newsletter sees the U.S. economy expanding 2.4% in 2008. That's down from a 2.6% projection made last month and a 2.8% gain forecast in August.

The downturn in housing will boost the likelihood of spillover effects on consumer spending and business investment, the monthly newsletter said.

Still, next year's performance looks set to be somewhat stronger than this year's. The panel of 52 economists projected growth of just 2% this year, a forecast that has held steady for three consecutive months.

Even while growth is seen picking up a bit next year, economists expect housing starts to fall to their lowest level since 1993 and look for consumer spending to post its smallest gain since 1991.

As for this year, the drag on the economy from falling housing activity is expected to prove more acute over the second half of this year than it did in the second quarter, and many economists expect home prices to log their first year-over-year decline since the 1930s, the newsletter said.

High inventories of unsold homes, tighter lending standards and falling prices suggest the housing sector will remain weak through 2008, it said.

The survey was taken in early October, before the release of a government report that showed the jobs market had fared better in recent months than earlier believed.

The report showed the economy created 110,000 nonfarm jobs last month, slightly more than expected, while job growth for the prior two months was revised up sharply, erasing what hadbeen a 4,000 job drop in August.

However, "the softening trend in private-sector jobs remains intact", the newsletter said.

Gains in jobs and incomes have been supporting consumer spending even as housing activity has slowed, but economists look for households to rebuild savings as uncertainty over jobgrowth and home prices mounts.

The economists predicted disposable personal income will outpace spending this year for the first time since 2002.

"The prospect of weaker job growth going forward and much smaller Wall Street bonuses than we've seen of late are risks to the relatively sanguine outlook," the newsletter said.

The expectation economic growth will remain sluggish over the coming year and that inflationary pressures will ease led a majority of the panelists to expect an additional interest rate cut or two from the Federal Reserve.

Fed policy-makers cut the benchmark federal funds rate by a unexpectedly large half-percentage point to 4.75% on Sept. 18.